One thing that I can say for certain is that my experience as a financial adviser
One thing that I can say for certain is that my experience as a financial adviser, which spans more than twenty five years, has taught me that it is almost impossible to time the market. Investors don’t want to miss out, but they don’t want to be caught out either. Are we at the top or the bottom? The best response, of course, is to put your faith in your long term plan rather than listening to the ‘noise’ around the markets.
I started as an IFA shortly after the Japanese ‘bubble’ economy went ‘pop’ in December 1989. I weathered the long slow economic recession of the early 1990s when interest rates hit 15%. I saw the Asian Financial Crisis of 1997, which was caused by a credit bubble and then a strengthening US Dollar. Next came the Dot-com bubble of 1999, followed by another UK recession in 2000. Finally, there was the credit crunch of 2008. We are now more than 8 years down the road from the great banking crash and interest rates in the UK are still stuck at 0.25%. On the other hand the FTSE has climbed from a low of 3,760.71 on 1st Feb 2009 to 7,333.02 on 5th April 2017 and this does not include any dividend income!
Many clients have been through these events with me too. However, I am pleased to report that our portfolios remain very much intact. I have never attempted to time the market believing that even with all of the ups and downs the only way to maintain the ‘real value’ (a value that remains ahead of inflation over the longer term) is to remain invested. That said, it would be foolish to avoid taking heed of the warning signs and to remain with ones ‘head buried in the sand’ hoping for the best.
Some have begun to question whether we are at the top and what will be our next moves? (In my view this is not a good question because; what is The Top? Markets settle upwards not downwards or why would anyone invest?). My firm long term belief (almost a Mantra) is to focus on income because this has a huge long term positive effect upon investment returns. When talking to clients I will often talk about the benefits of income from a ‘Buy to Let’ property as an example because everyone believes that they understand property. We know that property prices fluctuate and we know that sometimes it can take a while to sell a house, but we are happy to overlook these faults if the rental income is coming in and increasing year on year.
Looking at this from an investment perspective, according to Nick Britton, Head of Training at the Association of Investment Companies, their research shows that an investment in the average investment company (not the best one, just an average one) in the UK Equity Income sector would have produced an income that rose every year over the past 20 years and at a rate that comfortably outpaced inflation. The sums mean that over 20 years, investors would have received £119,872 of income from the portfolio and in the meanwhile the capital value would have more than doubled to £226,907. So, if you’re feeling at all concerned about your portfolio, an income orientated portfolio may offer slightly more downside protection through the reinvestment of dividends and other income streams than a growth focused one.
We know that in historical terms, the US market now looks expensive. (A technical explanation follows but it’s not necessary to understand it to follow my point). The S&P 500 12 month forward price-to-earnings ratio divided by implied volatility is at a peak. In addition, the Shiller PE ratio shows a current reading of almost 29 (marginally lower than the Dotcom bubble and the crash in the early 1900s). So we need to temper down our exposure to this market and look for cheaper stocks as well as spreading the investment into other markets.
For the last three years, possibly even longer than that, I have been concerned about the ‘fixed interest’ market (Gilts and corporate bonds in particular) because if/when interest rates rise then the values of these types of asset could fall substantially. It is important that we hold ‘fixed interest’ in a portfolio because they usually produce a decent income and, just as importantly, they limit the extent of loss within a portfolio when markets fall. So we have been gradually introducing alternatives such a ‘Floating Rate Notes’, inflation-linked bonds and very short duration investments to reduce the risk within the portfolio while still aiming to achieve better returns than cash.
It remains for me to say that I am NOT feeling pessimistic about the long term future prospects because the alternatives are not yet attractive enough to tempt investors elsewhere. Interest rates appear to be stuck on 0.25% and the ten year Gilt yield is currently only 1.10%, while inflation is just shy of 2.5%. Alternatively, the dividend yield on the FTSE 100 is 3.66% while the FTSE World Equity Index has a yield of 2.4%.
There may well be some short term volatility because some of the Brexit talks don’t go well for Theresa May or because Trump has quoted something inane on his early morning twitter account, but the long term power of dividend income and strength of well-priced sound investments will prevail over short term volatility.